[co-author: Imogen Bishop]

A settlement agreement relating to a dispute over legal fees of GBP 130,000 also covered a subsequent GBP 70 million claim for breach of contract and negligence.  The existence of a potential claim for breach of contract and negligence was not suspected at the time the settlement agreement was entered into.  Properly construed, the widely- drafted release clause and definition of claims captured claims beyond the initial dispute.  The context did not act to limit the scope of the settlement agreement.  A claim for breach of contract and negligence was within the realms of possibility rather than an "unknown unknown". Khanty-Mansiysk Recoveries Ltd v Forsters LLP [2016] EWHC 522 (Comm), serves as a good reminder of how important it is to consider the scope of release wording.  Often parties will be pulling in opposite directions when negotiating this wording, but it is vital to understand what is, and what is not, being "released".

The defendant law firm advised an oil exploration company on the acquisition of oil exploration licences through a transfer of shares in a Russian company. A dispute arose regarding an unpaid GBP 130,000 invoice for legal advice and a related guarantee provided by a company director. The dispute culminated in a tripartite settlement agreement between the defendant, the company and the director. The company subsequently discovered that the transfer of shares in the Russian company had not been effective and it was ultimately put into liquidation. The claimant acquired the company's claim from the liquidators and sought to bring a claim for breach of contract and negligence against the defendant relating to the legal advice provided in connection with the share acquisition. The court was asked to determine whether the settlement agreement relating to the unpaid invoice should be construed as having settled the present claim.

Settlement Agreement

The release clause in the settlement agreement provided for the full and final settlement of all or any claims which the parties had, or could have had, against each other. It was expressed to include claims currently in existence or coming into existence in the future, regardless of whether or not such claims were in the contemplation of the parties at the time of entry into the settlement agreement. Under the terms of the settlement agreement the parties also covenanted not to sue each other, directly or indirectly, in connection with or in relation to the claims.

"Claims" was defined to encompass any potential claim, counterclaim, potential counterclaim, whether known or unknown, suspected or unsuspected, however and whenever arising, whether or not such claims were within the contemplation of the parties at that time. Both the release clause and "Claims" definition, Eder J noted, were very wide.

The "Claims" definition was qualified by the wording "arising out of or in connection with" the action commenced to recover the amounts due under the invoice and the invoice itself.  The present claim did not "arise out of" that action or the invoice. However, the court held that, using the natural meaning of the words, the present claim was connected to the action and to the invoice as they all related to the provision of the same legal services.

Approach to construction

The parties acknowledged that the starting point regarding the construction of a settlement agreement was, as per the House of Lords' confirmation in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, that general release clauses should be construed in the same manner as the terms of any other contract, and that no special rules applied to their interpretation.

The claimant relied on the decision in BCCI v Ali to argue that the scope of the release clause in the settlement agreement should be limited by the surrounding circumstances. The claimant referred in particular to Lord Bingham's "cautionary principle"; that in the absence of clear language, the court will be slow to infer that a party intended to surrender rights and claims of which he was unaware and could not have been aware.

Eder J rejected the claimant's argument that the broad ambit of the release clause as drafted in the settlement agreement was limited by the context. It was accepted that the original dispute related only to the quantum of the unpaid invoice and the present claim for breach of contract and negligence was entirely unsuspected at that time, but such a claim was not wholly inconceivable. An objective observer would not have thought it impossible. It therefore differed from the claim in BCCI v Ali where the basis of the subsequent claim was only recognised by the House of Lords as a matter of law after the settlement agreement was formed, making it an "unknown unknown".

The court found that properly construed, the tripartite settlement agreement draft was sufficiently wide to settle all "Claims", not just those relating to the initial dispute, and that "Claims" did capture the present claim.

Comment: The narrow and limited nature of the original dispute relating to legal fees, as well as the disparity in value between the original dispute and subsequent claim for breach of contract and negligence, might lead the unwary to assume that an agreement settling the former would not encompass the latter. The decision underscores the need to consider carefully the drafting of the release clause and claims definition when entering into a settlement. Parties should be conscious that a widely-drafted agreement may compromise their ability to bring unknown claims in the future. The desire to achieve a final resolution to a dispute must be balanced against the risk of unintentionally settling potential future claims.

The broad drafting was held to evidence the parties' intention that the ambit of a settlement agreement should extend beyond their initial dispute and encompass claims such as the present one. Lord Bingham's "cautionary principle" did not assist the claimant when the wide wording of the settlement agreement was taken into account.

Moreover the court's reasoning suggests that against such a backdrop, few claimants will be able to rely on the "cautionary principle" where their settlement is widely drawn. The claimant in BCCI v Ali succeeded as the substance of its claim had not been recognised as a matter of law at the time that the settlement agreement in question was entered into, rendering it an "unknown unknown". This decision makes clear that unsuspected but conceivable claims will not be similarly excluded from the scope of a widely-drafted release clause.  

Also significant is the expansive meaning attributed to the wording "in connection with" in the analysis resulting in the finding that the present claim was connected to the original dispute relating to the unpaid invoice as they both related to the same legal services.